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Archive for March, 2011

It looks as if the stress test results this afternoon will focus on the mortgage loan books of the four institutions being examined. Here is a note setting out the facts and estimates of our residential property. You might also be interested in a comparison between two distressed property markets: Ireland and the US state of Nevada – apparently BlackRock has chosen Nevada as a key comparator when estimating mortgage losses.

(15) Amount outstanding on mortgages: €99.08bn in February 2011 (down from €109.98bn in February 2010)

(16) Mortgages advanced in 2010: 27,666 with a value of €5.7bn

(17) Mortgages advanced in 2006 (peak): 203,953 with a value of €67.6bn

(18) Number of mortgages 90 days or more in arrears: 44,508 (compared to 28,603 at end of 2009)

(19) Repossessions : 374 (in 2010)

(20) Negative equity affecting number of households: 416,000

(21) Unemployment rate : 14.7% (approximately 300,000 from a workforce of 2.1m – in addition, approximately 150,000 are in receipt of work related benefits which makes our Live Register approximately 450,000)

(22) Official GDP outlook in 2011 : + 1.75%

(23) Population: 4,470,200

(24) Mortgage arrears policy: There is a code agreed between the Central Bank of Ireland and mortgage lenders which can forestall repossessions for several years.

(25) Bankruptcy regime: One of the harshest in the world where bankruptcy can last 12 years plus. Is due to be reformed as part of the IMF/EU bailout. The UK bankruptcy rate is 350 times that of Ireland, the US bankruptcy rate is over 1,000 times that of Ireland.

Today will be a momentous day in Ireland’s economic history. In addition to the stress tests, we could theoretically get the Nyberg report into our disastrous bank guarantee and NAMA’s full year accounts for 2010 are due to be presented to the Department of Finance – I understand they have already arrived on Minister Noonan’s desk who might decide to publish them immediately. These publications would be side shows however and this entry is to track the main event, the publication of our stress tests, during the day. The central event is likely to take place at the Central Bank of Ireland at 4.30pm with the formal release of the stress test results, but the dramatic suspension of trading in AIB and Bank of Ireland shares last night seems to indicate that this day will not be as choreographed as some might hope, and this is Ireland where leaking is as common as rain. Here we go…

Firstly yesterday evening, Irish Life and Permanent had a low-key release of its annual report for 2010. Its loss for the year of €128m was down from the €313m loss reported in 2009 but there are those that claim that ILP has its head stuck in the sand ignoring the mortgage default storm that has been brewing for four years. The report may become the butt of many jokes if, as expected, it is confirmed today that the bancassurer needs €3bn to continue to operate.

Up to 9am

(1) Anglo Irish Bank publishes its annual report with accompanying press statement. With an annual loss of €17.7bn (USD $ 25.1bn at this morning’s exchange rate of €1=USD $1.4181), it places Anglo at number 13 of global corporate losses in an informal list compiled on Wiki. Anglo has already received €29.3bn of support via cash from our pension reserve and promissory notes. It is not clear if Anglo will need further injections and the annual report seems to ignore the Fine Gael commitment to wind down both Anglo and fellow-zombie, Irish Nationwide Building Society, in 2011. There is, however, reference to a merger between the two in the first half of 2011.

(2) The Independent is reporting that the additional bailout will be €25bn (€15bn for AIB, €5bn for Bank of Ireland, €3bn for Irish Life and Permanent and “more than” €1bn for EBS). It claims EBS will be merged with AIB.

(3) Our friends from the IMF, ECB and EU are in Dublin today. After all they have collectively advanced us €14bn+ of €67.5bn external bailout – remember we’re contributing €17.5bn from our own national reserves to bring the overall total to €85n – and in the ECB’s case we had €117bn of its funds propping up our banks at the end of February 2011. So I’d guess these creditors might be a little nervous as the new coalition plans its next moves. Ideally the creditors would like us to comply with the bailout agreement. (CORRECTION 2nd April, 2011. It seems the reporting of the arrival of our creditors was not accurate, in any event they are now reported to visit for 10 days commencing 5th April, 2011)

(4) The Irish Times speculates that Minister for Finance, Michael Noonan may attempt to merge ILP into Bank of Ireland. The newspaper also claims that “EBS is expected to require about €1 billion” and that the banks in general will need a “further €18 billion to €23 billion”

This morning

Meeting of the newly formed Government Economic Taskforce (Taoiseach Enda Kenny, Tanaiste Eamon Gilmore, Minister for Finance, Michael Noonan and Minister for Public Expenditure and Reform, Brendan Howlin)

10.13am. The BBC is reporting the stress tests “are expected to show the banks need an extra 30bn euros”

10.22am.RTE is reporting “numbers of between €18bn to €25bn” though it is unclear if that is RTE’s estimation or Mike Aynsley, the CEO of Anglo (Anglo by the way, alongside INBS, is not subject to these stress tests). Perhaps stating the obvious RTE report “one EU source told RTÉ News that if there was to be any burden sharing by bondholders it would have to be voluntary, and would require the consent of the so-called troika of the ECB, the European Commission and the IMF”

1pm. Well this is disappointing. The morning is gone and there are no new matters to report. It is interesting that the share prices of banks whose share trading is not suspended but which have substantial exposure to Irish property – mainly RBS (Ulster Bank is the local unit is up 0.3%), Lloyds (Bank of Scotland Ireland and Halifax were the local units before being closed last year with substantial legacy lending, up 0.5%), Belgium’s KBC (down 3.8%), Denmark’s Danske (National Irish Bank is the local unit, down 0.5%) and Holland’s Rabobank (ACC Bank is the local unit, the bank is private) – show a mixed picture this morning.

1.30pm Most of the bad news contained in the Anglo report and accounts published this morning was already anticipated following the release of unaudited year-end information earlier this year but it seems that Anglo CEO Mike Aynsley cost us more than €1m in 2010, being remuneration, pension, “other benefits” and expenses (most of the €46k referred to in the note below). The former government’s commitment to a €500k salary cap looks cynical in this context.

(Click to enlarge)

2.30pm For those advocating a burning of bondholders, you might get some comfort from comments today by retiring ECB board member, Axel Weber who is reported by Reuters to have said “that it was a big mistake for governments to make taxpayers liable for all bank risks” Also it understood that Minister for Finance, Michael Noonan’s presentation to the Dail later today (probably around 5pm but that it to be confirmed) will, according to government sources reported by the Irish Times, include a “watershed” argument for an EU-wide solution to pass losses onto bondholders.

3pm. It is difficult to tell from the performance of the euro on foreign exchange markets, how markets are anticipating the results of the stress tests. The euro has been up nearly a cent against the dollar as Eurostat released inflation information for March 2011 showing Euro-area inflation at 2.6% which virtually assures an increase in interest rates by the ECB in April, the present main rate being 1%. Curiously interest rate assumptions were missing from the macroeconomic data released by the CBI on 16th March, 2011 in the context of these stress tests.

4pm. Just 30 minutes to go before the main event starts with Central Bank governor, Professor Patrick Honohan presenting the results of the stress tests (technically referred to as the Prudential Capital Assessment Review – PCAR and Prudential Liquidity Assessment Review – PLAR). Meantime this may help you with an gaining an overview of the main banks servicing the domestic Irish economy. Bank of Ireland is presently 36.5% owned by the State, AIB is technically 49.9% owned by the State but is de facto 94%-owned when it converts some Convertible Non Voting shares to ordinary shares. The State presently has no shareholding whatsoever in Irish Life and Permanent (the bancassurer whose bank is called Permanent TSB). Bank of Scotland (Ireland) withdrew from Ireland last year but it has a workout vehicle called Certus which is presently managing a €30bn legacy loanbook.

4.10pm Thanks to Lorcan Roche-Kelly and his blog cornerturned which provides details of the ministerial statement “Irish Minister for Finance, Michael Noonan will be making a statement to the Dáil from 16:45 which can be watched here. – requires windows media player, alternatively, this link is to the Flash player“. I guess that CBI governor Honohan’s presentation will be quite brief without questions and answers.

4.20pm Apparently there’s quite an army of media folks congregating on the Central Bank headquarters on Dame Street in central Dublin. With Minister for Finance, Michael Noonan scheduled to make a statement at 4.45pm to the Dail, Professor Honohan will have to be quick to avoid a clash.

4.30pm CBI governor speech is here (PDF). Governor stresses the capital requirements are based on an adverse scenario. Press release from the CBI is here. And here it is, the results of the €20m stress test exercise. The capital requirement is €24bn and here are the projected losses. The full €20m stress test report is here.

After 4.30pm

Minister for Finance, Michael Noonan is to speak for 20 minutes in the Dail on the subject of the stress tests and banking sector restructuring

5pm Minister for Finance, Michael Noonan saying there will be two “pillar” banks – Bank of Ireland will be No 1 and AIB/EBS will be No 2 . Not clear where Irish Life and Permanent will sit, presumably with Bank of Ireland. Former Minister Lenihan, in response, says that ILP’s future is uncertain as to where it will fit. No mention at all today of €60bn medium term ECB liquidity facility.

5.30pm. The speeches in the Dail raise the concern that the ECB’s support of Irish banks has not been mentioned today. Nor has there been any reference to a €60bn medium term liquidity facility. ILP’s future is uncertain because it has not been clarified today. Additional financial needs for Anglo and INBS have not been discussed.

5.45pm. What the domestic Irish banking sector looks like after today’s announcements (see below). Separately the Irish Times has made available the audio recording of the CBI governor’s press conference. There has been a massive cock up today in that (1) the CBI video feed failed and (2) the CBI press conference clashed with Minister Noonan’s speech in the Dail.

6pm The Irish Times has made available a transcript of Minister for Finance, Michael Noonan’s speech in the Dail. It is a little concerning that so little information was imparted and ILP’s position seems distinctly uncertain. And no mention of the ECB.

8pm Joint statement from the EU/IMF/ECB available here from the IMF website. No word on a medium term liquidity facility from the ECB but the statement concludes “The staff of the EC, ECB and IMF look forward to discussing progress with implementing the measures announced today, together with a broader range of economic issues, during the program review mission starting next week”

9pm The Department of Finance has produced a presentation on today’s announcements. Its author is John Moran who has recently moved to the Department from the CBI. It has a pretty chart of the €24bn requirements announced today.

10pm Almost as a postscript to today’s announcements, there was a routine press conference at the IMF in Washington today where the following exchange took place with the IMF’s Director of the External Relations Department, Caroline Atkinson. It seems to betoken an openness on the IMF’s part for burden-sharing but there seems to be a reluctance to publicly state that out of courtesy to the EU/ECB. Well, it has been a bit of an anti-climax as a day and save for a €20m stress test which has produced a figure which excludes Anglo/INBS (there will be an entry tomorrow which will try to assess additional funding requirements at these two institutions based on the stress test results today) and Minister Noonan’s announcement this evening was pretty uninspiring. I leave you with the IMF news conference exchange.

CAROLINE ATKINSON (IMF): I have another question online: What is the IMF’s feeling on the stress tests in Ireland and their utility in restoring confidence? I am just going to put that off -– we are expecting announcements, as you all know, from Ireland on their stress tests later today so I don’t want to anticipate those announcements now.

QUESTION: Aside from these stress tests, does the IMF still believe that Ireland should restructure unguaranteed bank bonds?

MS. ATKINSON: That is like, have you stopped beating your wife.

QUESTION: But it has been a position that the IMF officials have taken before, so I’m wondering if it’s continuing to take that position now?

MS. ATKINSON: As you know, there will be a mission to Ireland in the first part of April so beginning very shortly, which will be our first detailed discussion with the new authorities on the program in the next review. I do not want to anticipate the discussions that will take place there

(4) Viva Las Vegas – a comparison between Ireland and the US state of Nevada’s housing markets, negative equity, repossessions (Nevada is reportedly one of the key comparators used by BlackRock in projecting mortgage losses)

The Nationwide Building Society has this morning published its UK House Price data for March 2011. There is also a new quarterly report for Q1, 2011 which sets out in some detail prices by UK region. The Nationwide tends to be the first of the two UK building societies (the other being the Halifax) to produce house price data each month, it is one of the information sources referenced by NAMA’s Long Term Economic Value Regulation and is the source for the UK Residential key market data at the top of this page.

The Nationwide says that the average price of a UK home is now GBP £164,751 (compared with GBP £161,183 in February 2011 and GBP £162,764 at the end of November 2009 – 30th November, 2009 is the Valuation date chosen by NAMA by reference to which it values the Current Market Values of assets underpinning NAMA loans). Prices in the UK are now 11.4% off the peak of GBP £186,044 in October 2007. Interestingly the average house price at the end of March 2011 being GBP £164,751 (or €187,503 at GBP 1 = EUR 1.1381) is 2.2% below the €191,776 which the Permanent TSB/ESRI said was the average nationally here at the end of December 2010.

With the latest release from Nationwide, UK house prices have risen by 1.2% since 30th November, 2009, the date chosen by NAMA pursuant to the section 73 of the NAMA Act by reference to which Current Market Values of assets are valued. The NWL Index has risen by 1 to 894 (because only an estimated of NAMA property in the UK is residential and only 29% of NAMA’s property overall is in the UK) meaning that average prices of NAMA property must increase by a weighted average of 11.8% for NAMA to breakeven on a gross basis.

The quarterly report from Nationwide shows that London and the south-East are still performing best and have risen by over 2% in the past year. Northern Ireland is in a league of its own having dropped most in the UK by 10.8% in the last year (coincidentally exactly the % drop in the Republic according to the ESRI/PTSB).

The short-term outlook for UK residential remains bumpy. Interest rates may need to rise to contain inflation that is beginning to take hold – 4% in January 2011, 4.4% in February 2011 – both on an annual basis. The UK target is 2% so the base rate which has been at 0.5% since February, 2009 may need be raised. Last Wednesday’s Budget 2011 estimated growth in GDP of 1.7% and 2.5% in 2011 and 2012 and inflation of 4-5% this year falling to 2.5% in 2012. Net debt will be 60% of GDP this year rising to 71% in 2012. Scary for the UK but paradise compared to the 100%+ in Ireland. The UK is also struggling with a deficit that was 11% last year (compared with 12% in basket-case Ireland) but there are swingeing cuts to public services in prospect to bring the deficit down to 4% by 2014/5. London saw its largest protest marches last weekend since the 2003 protests on the eve of the Iraq war – students, the public sector and recipients of state services are not happy. What all of this means for property prices is uncertain of course but the betting is that prices will come under modest pressure and may fall this by less than 5% in 2011 – the Office for Budgetary Responsibility was saying 2.7% late last year but finances have deteriorated since then. The UK has plenty of micro-markets and the betting would be that London and the south-East will fare better than the North of England and elsewhere, Northern Ireland in particular.

With EBS state-owned, Irish Life and Permanent having suspended dealings in its shares until Friday, Allied Irish Banks effectively 90%+ state-owned and Bank of Ireland 36.5% state-owned but with the prospect of majority state control all but certain, you might wonder why the Central Bank of Ireland has chosen a time after the markets close tomorrow to make its announcements with respect to the results of the stress tests. But choose it has, and here are the arrangements for publishing the eagerly awaited results of the stress tests

“The Central Bank of Ireland will publish the Financial Measures Programme report, which details the outcome of the 2011 review of the Prudential Capital Assessment Review (PCAR) and Prudential Liquidity Assessment Review (PLAR) for AIB, Bank of Ireland, EBS and Irish Life & Permanent, at a press conference on Thursday, 31 March at 4.30pm”

The Financial Measures Programme report will be published here at 4.30pm.

UPDATE 30th March, 2011. RTE is reporting that share dealing in both AIB and Bank of Ireland will be suspended from 6.30am tomorrow. These two banks join Irish Life and Permanent in suspending trading. The decision was taken by the CBI apparently in conjunction with the Irish Stock Exchange to preserve “the integrity of market trading in the financial sector” Presumably trading will recommence on Friday 1st April, 2011. Mind you, makes you wonder why the Central Bank needs wait until the markets close at 4.30pm to make its announcements ….

On the general election campaign trail last month, Enda Kenny, injudiciously in my opinion, referred to the Cardinal Consortium as the preferred choice as buyers of state-owned EBS, but today the National Treasury Management Agency has issued a statement that the sale of EBS, which has been ongoing for nearly a year, has been cancelled because “the bid [by Cardinal] was not sufficiently commercially attractive to the State”

It was September 2010 when CNBC prematurely announced that the Cardinal Consortium which comprises Dublin’s Cardinal Asset Management , Wilbur Ross and the Carlyle group had won the battle to buy Irish state-owned Educational Building Society (EBS). As it happened, the bidding battle had some way to go and at that time there were still four bidders which were Cardinal, JC Flowers, Doughty Henson and Irish Life and Permanent (ILP). The bidders were whittled down to just two in October 2010 with Cardinal and ILP remaining in the race. Cardinal was touted by Enda Kenny as the preferred bidder. This morning ILP suspended its shares on the Irish Stock Exchange following rumours that that it will be imminently nationalized following publication of the bank stress tests tomorrow.

The cancellation of the EBS sale is perhaps not a surprising development. The Carlyle group is known for its tough negotiating character. Tomorrow we are likely to find out that EBS needs more capital than previous forecast, because of more severe losses on its mortgage loans. So perhaps Cardinal was felt to be playing hardball.

The expression “one red cent” is gaining a lot of currency here in recent times. The origin of the expression is said to be the copper-ish red colour of the lowest unit of currency, the cent, in the US in the early 19th century and is used to betoken the smallest sum of money possible – to not pay “one red cent” means to pay nothing. Not only did Denis O’Brien unconvincingly – in the sense that most respondents to an opinion poll published in last weekend’s Irish Independent, didn’t believe him – claim that he had not paid former Minister Michael Lowry a “red cent” in return for favours in awarding a mobile telephone licence in 1995, but it was only a month ago when then-Opposition parties were eager to tell us that they would not be putting “another red cent” into Irish banks until the results of the stress tests became known in March.

Well, here we are one month later, and the stress test results will be published tomorrow but as this is Ireland, we seem to have had a healthy dose of leaks already which has caused Irish Life and Permanent to suspend trading of its shares until 1st April and the consensus is that the stress tests will indicate that a further €20bn will be needed by the banks to meet stringent capital requirements. This is €15bn less than the €35bn allotted to resolving our banking difficulties in the EU/IMF bailout, though it’s not clear which contributor to the bailout – EFSF/EFSM/IMF/domestic resources – will see a reduction in their contribution. However if the additional cost of capitalising the banks is put at €20bn then that will still mean that the cumulative bank bill will rise to €66-71bn. The table below is from the Department of Finance last September 2010 and shows the commitments at that time.

Anglo was to have cost us €29-34bn and unless we get an update on Anglo’s needs tomorrow (remember the stress tests didn’t touch Anglo or INBS) then we will probably have a range of values tomorrow also.

So what next? Will the stress tests be debated in the Dail and will options be explored including default? Will the Coalition simply stump up the €20bn without debate? Is it imperative that we act on the results of the stress tests immediately or have we the freedom to ponder our options over the coming weeks? Is now the time to re-open the “burning the bondholders” debate

– remember this was the bondholder position in Irish banks in February 2011, although there has been a massive redemption of bonds since the guarantee in September, 2008 there are still substantial sums that can, theoretically, be burned. Here are a few scenarios for the next few days.

(1) The government tells our bailout partners, particularly the ECB, that when we accepted the bailout in November 2010, the understanding was that the maximum additional sum required for the banks would be €10bn – after all, that is what one of the key negotiators, Central Bank of Ireland, Patrick Honohan was saying – and now that it is €10bn more, this is an appropriate time to discuss burden sharing. Might the ECB be supportive of burning the €16bn of unsecured unguaranteed senior bonds, maybe by paying them 50c in the euro.

(2) The government accepts the €20bn additional cost for bailing out the banks, but requires the ECB “medium term” facility to be set at €190bn, not €60bn. In that way, Irish banks will have a strategic certainty which they presently don’t have – the ECB, which is providing exceptional liquidity support, might unilaterally pull the plug. No country should allow its banking system to operate on this hand-to-mouth basis, especially since the “hand” is the ECB and beyond the nation’s control.

(3) The government accepts the €20bn additional cost for bailing out the banks but requires the EU to provide its element of the bailout at a cost interest rate, that is 2.8%. The 3% saving would amount to some €10bn in interest savings over 10 years. Given the Irish nation is taking on 100% of the banks’ liabilities, including those to shaky banks in Germany, France and the UK, then the least that can be done is to provide these funds at cost.

(4) The government accepts the €20bn additional cost and seeks a stimulus grant from the EU to allow our economy to grow so that the debt can be repaid and we don’t default. The stimulus might be used to fund capital programmes in broadband and communications, energy, transport, education, health, security including prisons. It happened before in the 1990s. Surely we now need it more than ever.

(5) The government accepts the €20bn additional cost but seeks an extension of the term over which the EU loans can be repaid. If the EU element of the bailout has to be repaid by 2018 and repayments start in 2015 then that means we need find €10bn per annum which might still be costly to secure from the market.

(6) The government chooses the nuclear option and takes the position that not only is the additional €20bn not sustainable but the €35bn of promissory notes already created last year for Anglo and INBS will not be honoured. The government disowns the guarantee, perhaps justifying itself on the basis that the guarantee was founded on incorrect information. A bank resolution process is put in place which protects depositors to €100,000 or €20,000 and beyond that, the banks are wound down as would normal commercial companies. No-one realistically believes the nuclear option will be pursued but it should surely be made clear that it is an option.

I have a feeling that tomorrow’s stress test results will be a bit of an anti-climax but regardless we are likely to have an official point estimate of the “final” cost of rescuing the banking system and the moment of truth will have arrived for our new government. There will be coverage here tomorrow.

Well I’m confused. The Irish Independent reports today that NAMA “looks set to secure about €17m” from the sale of a 1.5 acre parcel of land near to Waterloo rail station in south London (pictured here). The Independent says the property is expected to sell to close to its asking price of GBP 17m – maybe NAMA is going to “net” part of the sale price, maybe the Independent has mixed up its currencies between sterling and euros. The Independent doesn’t name the developer but does say that the sale has been managed by British property consultants, Edward Symmons acting as receivers, and the sale is to a hotel development and management company, Shiva Hotels (other news sources claim the purchaser is a consortium which comprises Rising Star and Shiva). Of course in the UK, they have administrators, not receivers, but that’s possibly splitting hairs.

What’s confusing is I can’t find any record of the property on the Edward Symmons website, which shows property for sale. Even if the property sale has just completed, I would still expect to see a record for it, perhaps with an “under offer” or “sale complete” sign.

The 1.5 acre site has planning permission to develop a 300-bedroom hotel which is expected to operate under the budget Hampton by Hilton hotel brand. The site is presently occupied by a derelict office building, called Partnership House. CB Richard Ellis were offering a 0.55 acre site for sale at 157-183 Waterloo Road but it is not clear when the brochure was dated and if it is current, though the Independent today makes reference to CBRE as the “property’s agents” – I could not find any record of this property on the CBRE UK website.

So for the moment, the developer remains a mystery, NAMA’s involvement is a bit of a mystery and the €17m is a mystery also. But possibly of most concern is that a property in which NAMA is said to have an interest and which has sold doesn’t appear to be offered for sale by the firms associated with the property.

UPDATE 30th March, 2011: The building was owned by developers CPSL Limited before that company was placed in administration in 2009 with property consultants Edward Symmons being appointed Law of Property Act (LPA) administrators then. The loan securing the building was from Anglo Irish Bank and presumably on that basis was absorbed into NAMA . The site finally obtained planning permission for redevelopment as an hotel in 2009 from Lambeth Council in London, having had a previous application in 2008 rejected. Former residents of the building include the Church Mission Society which had occupied part of the building since 1966 and was responsible for the motto carved into the front annex of the building on Waterloo Road : “Go forth to every part of the world and proclaim the good news to the whole creation” – seems like NAMA is doing just that!